RBA rate cut expected by year end

By James Mitchell

14 May 2014

The federal Budget has created compelling evidence for the Reserve Bank to cut interest rates - rather than raise them - by year end, according to a former RBA employee.

The government’s plans to undertake a notional fiscal tightening of 1.3 per cent of GDP in the 2015 financial year represent a weighty argument for a rate cut, Credit Suisse research analyst and former RBA employee Damien Boey told MortgageBusiness.

While residential investment may carry the economy in the next couple of quarters, building approvals have peaked by cyclical standards, he added.

AMP Capital had penciled in a rate rise by year end. Speaking at an ASFA Budget luncheon in Sydney yesterday, AMP Capital chief economist Shane Oliver said there is not enough in the Budget to change his prediction.

“But obviously there is a risk that if there’s so much talk about the doom and gloom – the eventual welfare cutbacks and so on – that the Reserve Bank might feel ‘well, we’re better off waiting for that rate hike until next year’,” Mr Oliver said.

“So it could, over time, help to reinforce relatively low interest rates in Australia, and at least help to delay rate hikes – although not dramatically,” he said.